20th April 2012
Argentina has left itself largely friendless. YPF was owned by Spanish group Repsol and the Spanish Government has not taken kindly to the apparent misappropriation of its assets: "Speaking at a World Economic Forum meeting in Mexico, (Spanish Prime Minister Mariano Rajoy) said the Spanish-controlled company was being expropriated "without any justification." Spanish Industry Minister Jose Manuel Soria promised "consequences" in the coming days. "They will be in the diplomatic field, the industrial field, and on energy," he said."
Rather than bowing to international pressure, Argentine President Cristina Fernandez de Kirchner expanded the raid. William Hague is quoted as saying: "This is the latest in a series of trade and investment related actions taken by Argentina which are damaging to business interests and will undermine Argentina's economy by reducing its attractiveness to international investors."
Argentina has also angered the Chinese through the move. Sinopec Group had been eyeing YPL as a possible takeover target: "Bankers said China's second-largest oil company had held talks with Repsol to buy its controlling 57 per cent stake in YPF. Chinese website Caixin.com cited a source as saying Sinopec had reached a non-binding agreement to take over YPF for more than £9bn.
"But plans by Argentine President Cristina Fernandez to seize control of YPF, which have incensed Spain and sparked international criticism, have killed any hopes that state-owned China Petrochemical Corp (Sinopec) could seal a deal, they said."
Argentina's move is the greatest fear for emerging market investors – political intervention in companies. Russia has been the other stock market with a poor reputation among international investors and has historically traded on low valuations as a consequence. Property rights are fundamental to creating long-term stability: This Policy Exchange briefing examines the consequences of the Argentine default in 2002 and concludes: "It is risky to treat investors unfairly as it can lead to countries being locked out of international financial markets with adverse consequences for their eventual recovery. Despite the political pressures to punish investors they need to be treated fairly to limit the adverse consequences, both immediately in terms of other vulnerable countries and in the future for the return of defaulted states to the financial markets."
However, Argentina's move seems to be an isolated case for a number of reasons: It has been widely condemned by emerging market governments as well: "Felipe Calderón, Mexico's president, said that "no one in their right mind is going to invest in a country that expropriates investments"; Also, Argentina is considered a ‘frontier' rather than ‘emerging' market partly because of its poor record on shareholder rights: "The downgrade comes "as a result of the continued restrictions to in- and outflows of capital in the Argentinean equity market," MSCI Barra said." This move may have been criticised, but it has surprised few; Equally, given the international opprobrium it is unlikely that other emerging markets would look at Argentina's experience and wish to replicate it.
Also, it is not solely an emerging market problem, but affects developed market funds that hold Repsol, whose share price has slid since the news.
Although an isolated case, it should serve as a reminder of why emerging markets have a risk premium over developed markets. The returns can look very seductive, but due diligence is vital.
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